TRP 317: [Legal] Exit Readiness for Law Firm Founders with Pam Meissner

[00:00:10] You're listening to The Rainmaking Podcast, hosted by high stakes headhunter, author, and professional speaker, Scott Love. Hey, this is Scott Love with The Rainmaking Podcast. Thanks for listening. If you're a law firm founder and you've thought about merging your firm into a larger organization or maybe even selling it all together, in other words, talking about that exit, we're going to talk about that today.

[00:00:39] This episode is in our legal specific series of shows in the podcast. And our topic title is Exit Readiness for Law Firm Founders. Our special guest is Pam Meissner. She's a consultant that works at Cathedral Capital. Now that company works with law firms and other professional services organizations, those that want to grow their organizations. They get involved in all aspects of strategy, succession planning, logistical support.

[00:01:06] Check out Pam's bio link. We put all of her contact information on the show notes, as well as other resources that she mentions. This is an episode that you don't want to miss. If you thought about merging your firm in with another organization, you definitely want to listen to this episode. This podcast is sponsored by SharePoint Legal Insights, formerly known as Leopard Solutions, turning legal intelligence into opportunity. The show is also sponsored by the Rainmaking Magazine. Don't lose business to the competition.

[00:01:34] Read this publication and keep business development top of mind. Visit therainmakingmagazine.com today to chart your course to greater rainmaking success. Thanks for listening. I hope you get some great ideas from my conversation with Pam Meissner today. Hey, this is Scott Love with the Rainmaking Podcast. Our special guest today is Pam Meissner, and we're talking about exit readiness for law firm founders. Pam, thanks for joining me on the show today. Oh, it's my pleasure.

[00:02:03] Yeah, I'm excited about having you on here today and also talking about this topic. And let me get some working definitions in place. And this is to those law firm founders that have decided they want to leave their firm. Maybe they want to sell it or merge it in with another organization. What does that mean, exit readiness? What's a good working definition for us today on that? That's a great question. So 85% of entrepreneurs that sell their businesses regret it in the first year.

[00:02:33] Why is that, do you think? Yeah, it has a lot to do with their sense of self and what their plans are after the exit. And they spend so much time on the valuation, so much time on, you know, getting the most out of what they've built that they don't think about the next steps.

[00:02:56] So exit readiness is about being educated on what's ahead of you, both in the transaction, because it's the one transaction you're going to do. The other party is probably going to do two or three. And then also be prepared. You know, so often these founders are just burnt out, right? Because they got into this because they wanted to make life-changing money.

[00:03:22] They knew they could make a difference in a way that nobody else could. And they wanted to be their own boss. They've probably done two of the three, but the game-changing money is all wrapped up in their firm. And so now's the time to figure that out. And there are some hiccups that can come along the way if your firm is all about you. That's interesting.

[00:03:48] Because nobody can really buy you. You can join another firm, but if you want to sell your firm, you need to know what the buyer wants. I just gave a speech at EOS called EOS to Exit, helping owners understand what are the buyer metrics as opposed to what the metrics are that you run and that your firm is successful now. Because what you have built is something that works uniquely for you.

[00:04:15] And you need to put on a different set of glasses and look for what is the value that a buyer would see. So let me dig into that. First, I want to go back to what you mentioned. They're not looking at the next step. Let's say a firm sells, they merge, whatever it is. What are those next steps that you've seen? What should they be considering as that next step, Pam? Well, I think they need to get in touch with, you know, is it spending more time with family and friends?

[00:04:43] Is it not doing all the admin work? You know, why are they selling? Are they selling just because they think that's what they should do? Usually my homework assignment is step away from your firm for 60 days. Wow. Can they even do that? Two things are going to happen. And it's a fabulous exercise, right? They can take a long trip to Europe or to Africa, right?

[00:05:10] But if you step away for 60 to 90 days, if things are going to break, that's a to-do list. If things that you are the only one who can keep it together in certain areas of your firm, whether that's rainmaking or team management, finances, whatever it is, if you're gone for 60 days and something breaks, then that's going to reduce your value.

[00:05:38] The other thing you're going to figure out in those 60 days is, can you do it? So the speech I just gave was called love it or list it, right? Build something to sell now. You don't have to sell it. You can move from the operator into the owner's box. But when you're ready to sell, you have optionality. So I've got a couple of questions about this. You mentioned step away from the firm for 60, maybe 90 days. Have you given that advice to people? Have they actually done that?

[00:06:07] Like, I'm just going to go to Europe for two months? Yes. Yes. Most, I will say, don't. And that in and of itself gives them the action item that they need to take, which is, I just need to make a list. What if I'm not there today, right? What happened on the last vacation? I have had people do that. And sometimes it is choice and sometimes it's inflicted on them.

[00:06:33] I had a leader of a law firm have a personal crisis. My business had two in the last month. Personal crises that they just had to attend to. You know, another business owner down in Texas, you know, his family was part of those floods that took out all those campgrounds and everything over July 4th a couple years ago. You know, and that took him offline. Wow. Luckily for him, his business survived.

[00:07:01] But he came back with a new perspective on his business. And he offloaded some of the stuff that he was uniquely qualified. The other thing is, we dream, right? On those hard days, we dream about what we want to do next. And that gets you at most, at most, your dreams get you one year out. Wow.

[00:07:26] So if they go away for 60 days and they come back and they see I've got some work to do, what are the more common areas they need to focus on so they can be sellable? Right. So it's usually taking hats off, right? Oftentimes, the leader of the firm, what a buyer wants is systems. Okay. They don't want to buy you. And so if you don't have a system for bringing leads into clients into the firm, then it doesn't have much value.

[00:07:55] If you're part of the production of the firm, then it doesn't have much value. If you're part of the admin of the firm, you need to build up those structures. And that's why a lot of firms during the exit journey often turn to something like EOS or something that helps them build those structures out and take those hats off. Usually, owners can't do it on their own. They need some kind of accountability. Yeah, that's great. This is really helpful.

[00:08:25] So you mentioned look at the buyer metrics. What are those metrics? What exactly does that mean, Pam? Yeah. So most entrepreneurial law firms, most entrepreneurs run a whole lot of stuff to be tax optimized through their firms. You got to strip that stuff out and look at just what the firm is and what the firm needs. What a buyer is going to look at, it's going to look at trends.

[00:08:52] You know, when we work with clients, we do a lot pictorially to see what is the story that your numbers are telling you. Not so many numbers in boxes. And there's a metric called CAGR, compound annual growth rate, that you can run on your top line. You can run on your bottom line. That's what a buyer is going to look at is are you continuing to grow? Because they don't want to buy you as is. They want to buy you for what they can make you.

[00:09:22] And so you have to make sure that you have the systems in place and that you're looking at things like valuation. Right. A metric that so many people use is revenue. Well, revenue growth is more impactful than revenue. They look at net income or distributions or something like that. You're going to look at total owner benefit. And then think about all the opportunities.

[00:09:52] One question I ask owners when they come to us to talk about an exit and that and doing that roadmap, that runway, is if you were a younger person, what would you do with this firm? They're going to look at turnover. You know, big part of your systems is do you have people that stay? Because that's a sign of a healthy business.

[00:10:18] They're going to look a lot at your pipeline, at how you get new business. And this is important for another reason. Oftentimes with these deals, there's an earn out period. Right. If the firm is highly dependent upon your reputation, they're going to want you to stick around and and work to prove that the business can continue with with or without you. You got into business for three reasons.

[00:10:45] You can make a difference, game changing money, and you wanted to be your own boss. That ends at that point. You become an employee of somebody else and that goes directly against your grain. And so you can shorten that period up by getting yourself out of the business so they don't need you because nobody wants to be miserable. This is insightful.

[00:11:09] Have you seen owners, let's say they're like in their mid-50s, and they're thinking, I want to retire maybe early to mid to late 60s. And it's just them and a couple of admin and maybe one associate. Have you seen them go through and build a team in a short period of time? Or is this more if you haven't done it at that point, it's not likely that you can build something saleable? What do you think about that, Pam? I'm not saying it's not possible.

[00:11:37] You have to bring in additional team members, particularly additional attorneys. The solopreneur, it's like you own your own job. Okay? You really don't own a business. So with that person we would work with, do you want to build a business? You know, in the beginning, multiples in law were really, really low. I mean, you've done a few transactions. What multiples have you seen? Right.

[00:12:05] Mine are usually just tied to the comp in terms of what they make. And it's not necessarily a true acquisition. Okay. Where there's a purchase, there's a multiple based on the EBITDA. It's basically, we're going to absorb your client relationships, your debts. But we may give you the AR. They may give that to you. We'll give you the AR for the next 12 months. And that's kind of a nice bonus. Okay. So I haven't seen it to where it's structured the way that you're talking about. Okay. And let me ask you this.

[00:12:34] Those firms that are at that point where now that private equity and managed service organizations or what everybody's talking about, what does that mean? A lot of people just don't know yet. But how do you think in that context, a firm should be positioned? Should they be really looking at getting that EBITDA as high as possible? Well, there's two numbers, right? One is the EBITDA, the total under benefit. And the other is the multiple. You know, for a long time, multiples in law were two to four, maybe five.

[00:13:03] So you're only getting two to five years of what you're already getting. Some new deals have come out that are closer to eight. And at eight, that gets really interesting. What gets you from a two to an eight? It is reducing owner dependency, developing a machine that has continued upside potential, right? You haven't maximized the market.

[00:13:30] One of the things you also need to know is oftentimes because you've been successful at building something that's attracted to them and they're going to give you a higher multiple, they're going to want you to stay on to be part of that MSO, that managed service provider, which is mostly where firms are going now outside of Arizona and things like that. And so you just need to be prepared for how that works.

[00:13:55] I've talked to a lot of these people and, you know, they have got it figured out. This is what I'm going to do. And, you know, bright eyes. And I'm just like, oh, you don't know what you don't know. Very few of them do I actually believe in. I think I have three to five that I think are worth selling to. And right now it's a seller's market. I don't know how long it's going to stay that way, but right now it is a seller's market.

[00:14:25] What are those common attributes? Those firms that you say really are saleable. What are those common attributes among those? They have systems. They have continuous growth. They have tremendous upscale potential and they can be the example right now to kick off an MSO, to build a platform that PE wants. That's really interesting.

[00:14:50] Look at those firms that have indicated an interest in wanting to do this, but they just fall short. They're just not attractive targets. Is there hope for them? What do you think the most common issue or deficit is that they might be able to fix to be more attractive? What do you think about that? That's a great, great question. I spent a fair amount of my career in Russia and the Russians say hope dies last. So I am hopeful.

[00:15:18] And I know there's I've talked to a guy out of California and he's going around and buying these people up that that they have one or two associates. And they're just looking for their business to continue. And he's developed a model that that is a win win. I haven't seen that in other states. No, I take that back. There's a guy in Indiana who's going around accumulating. I think it's trust and estates attorneys and their practices.

[00:15:48] And so there is a solution because I truly believe for every company that's out there, there's a buyer. Right. That said, only 20 to 30 percent of the businesses, not just law firms, but the businesses actually sell. Right. So is it practice dependent? What have you seen?

[00:16:10] Is it more the boutique type firms, more in B2C like family law, personal injury or more corporate defense, intellectual property, M&A transactionals? Are there any practices that you think are more attractive to a potential buyer? You know, in the beginning, a lot of the buzz, the talk was about PI. And I mean, it makes sense, right? Because the upside is like, wow, you know, that's very attractive.

[00:16:41] And PE likes risk, right? So they're going to come in and go there. There are, though, other plays being made. And, you know, recently I talked to two, what's the new trendy way to say it? Trust and estates asset protection firms. That I met them and I'm like, you know what? I could buy them. I mean, that is a well-run company with tremendous upside.

[00:17:08] So I don't see it being so PI or nothing these days. I see the potential out there. That being said, I think you need to do your research to know who are your potential buyers. I think one of the things that people struggle with is, do I want to sell to PE? And you don't have to because there's other options out there. Right. What are the pros and cons with selling in to the private equity MSO model?

[00:17:37] What's your assessment of that, Pam? Private equity is all about optimizing. And it is all about reducing costs and constantly growing. And it is a fine environment as long as you're hitting your numbers. If you don't hit your numbers, many people reflect that it's unpleasant.

[00:17:58] The biggest reflection I see of owners considering taking money from PE is their people, their culture. You know, these are people who have spent their whole career building something. And they go off and sell it and things change. And it's like somebody's, you know, just taking a knife to them every day because they care about these people. And so people, you know, lose their jobs.

[00:18:28] People are expected to do much more for the same amount of money. I think that's hard. I think it's also hard when you sell something and PE just, it takes off with PE. Because it's like, I could have done that. So, so much of their... Could you, you ask them, could you really? Right, right. So, you know, it can work both ways. And that's why knowing what you're going to do after is so critical.

[00:18:57] Because if you're going to stay tied to that firm emotionally, that's just going to be hard. So tell me a story of a firm you worked with. And you don't have to mention the name, of course. But what were the challenges that they had? What was the advice that you gave them? What actions did they take? And what was the end favorable outcome? Yes. So I'm thinking of one particular firm. And he came to us and he was really embedded. He had lots of staff, right?

[00:19:26] But he is a maverick and he's so niched down, right? He's several levels and prints money, okay? But he was miserable. And his business had little to no value because it was so dependent upon him. So he rebranded. And so now he's put money into people recognizing the brand and not his last name. Wow.

[00:19:55] Before that, he had tremendous turnover. And he's like, these people these days, if I heard that, if I had a dollar for every time I heard that, or these young kids. But he dug deep and figured out, one, how to hire better, right? So people that aligned with his core values, you know, people that weren't job hoppers.

[00:20:17] And he assembled a real, and he, you know, he had to humble himself quite a bit and own his pieces of the issues. And then he took off some more hats.

[00:20:28] And, you know, recently he got offered, he moved himself from, you know, being the center of the wheel and all the spokes coming off from him to being firmly in the owner's box, you know, doing the things that he loves, like teaching and training and coaching and developing people, coming up with strategies. So he actually loves his firm now. He had a deal on the table that was fabulous, fabulous.

[00:20:58] And he's like, hmm, I've got five more years in me. And I think that I can do X, Y, and Z. And I think I can do better than the other people. And so he chose first to list it. And now he's choosing to love it.

[00:21:16] And what happened in there is we got more money to the bottom line by optimizing his processes and honestly, not paying, you know, having a stable team. Right. And then we improved his marketing. So it wasn't dependent upon him. And all of that, we got it less owner dependent.

[00:21:40] And so now it doesn't weigh him down, but we increased both the EBITDA, the total owner benefit and the multiple. And so his business went from being worth little to nothing to being at the top of all the charts. Right. That's a fantastic story. It is. And it didn't take that long. He did it.

[00:22:05] He was so, he and his wife were so convicted that I think we saw substantial progress after 18 months and game changing after 24 to 28 months. That's great. Congratulations on that to you and to him and his colleagues, Pam. That's fantastic. Right. Right. Owners need to get what they want out of their firms. I'm not here to tell you what you want.

[00:22:33] I'm here to help you get what you want. So, Pam, I appreciate you sharing all of your wisdom with us today. This is really interesting. If you could summarize three action steps for those firm founders thinking about selling their firm and wanting to position themselves so that they're able to, in a very attractive way, what are those three action steps you'd share, Pam? Write down on a piece of paper the number you want because we can work backwards from there. Get a valuation. So that's one. Right?

[00:23:03] Write your number down and then get a valuation to figure out what it's worth now. Take that 60 to 90 days off and figure out what you want to do with the rest of your life and what's going to break or what has broken while you're off. And third, buy Brooke's book. Exit on top. Sell your firm to the right person at the right time for the right price. That's great. We're going to put the link to that book and also to your information, Pam, in the show notes.

[00:23:32] So everybody listening, just go to the show notes wherever you hear this podcast and you'll be able to connect with Pam directly and buy Brooke's book also. We'll also put Brooke's previous episode in the show notes as well. You'll be able to hear that from a couple of years ago. Yeah. And then tell us about what do you do, Pam? Tell us about your offerings. What do you have? What do you do that you'd like for everybody to know about? Right. So we're fractional CFOs. We have a nationwide reputation for driving profit in small and medium-sized law firms. We increase value.

[00:24:02] However you define the value, if it's exit value, if it's, you know, people come to us for financial visibility, for more time or more money, or to exit. That's what we do. That's fantastic. Pam, thanks so much for being here on the show. And like I said, everybody, check the show notes. You'll be able to connect with her directly. But I'd love to have you back on the future, Pam. Oh, well, thank you. That's quite a compliment. Thank you for listening to The Rainmaking Podcast.

[00:24:31] For more information about our recruiting services for international law firms, visit our website at attorneysearchgroup.com. To inquire about having Scott speak at your next convention, conference, sales meeting, or executive retreat, visit therainmakingpodcast.com.